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The scrap metals industry’s brave new world

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A pair of billion-dollar-plus deals has changed the game for an industry that has resisted large-scale consolidation until now.

PHILADELPHIA — The mom-and-pop era of the scrap metals industry may be over if the two big transactions announced recently are any indication of a trend.

Steel Dynamics Inc. (SDI) stunned many with its Oct. 1 disclosure that it will acquire family owned scrap recycler Omni-Source Corp. in a deal valued at slightly more than $1 billion. Both companies are headquartered in Fort Wayne, Ind. Many in both the scrap and steel industries were still reeling from the announcement one week earlier that Chicago-based scrap processor Metal Management Inc. would combine with Sims Group Ltd., the big Australian recycler.

If completed, both billion-dollar-plus transactions will overshadow the usual scrap industry pattern of a smaller company whose owner might be close to retirement being bought a larger industry member. But it also could be the start of a new wave of buyouts and acquisitions in an industry that is seen as ripe for consolidation because many of its members are small, family owned companies.

The two transactions represent differing strategic goals for the companies involved. For SDI, the purchase of Omni-Source will provide the flat-rolled mini-mill with an assured supply of scrap, including much of the highly prized industrial steel scrap like factory bundles that it and other flat-rolled steelmakers prefer. It also is expected to insulate SDI somewhat from the impact of scrap price volatility.

Keith Busse, SDI's chairman and chief executive officer, said his company's purchase of OmniSource is part of SDI's efforts to "backward integrate" into raw material supplies for its steel furnaces. A week earlier, SDI had announced plans to pursue iron ore projects in Minnesota, indicating that scrap would not be the only feedstock for its melt shops. "Having OmniSource join our family sort of completed the circle from a backward vertical integrated perspective as it would relate to processed resources," he said.

Under the terms of the deal, SDI will acquire all of the outstanding stock of OmniSource in exchange for $425 million in cash and 9.7 million shares of SDI stock. The aggregate transaction value includes SDI's assumption of certain liabilities, including net debt, which is expected to be about $210 million at closing.

OmniSource will operate as a wholly owned subsidiary of SDI and will maintain its focus on ferrous and nonferrous scrap processing, brokerage and industrial scrap management. SDI's existing scrap operations in Tennessee and Virginia will be consolidated into OmniSource, as will the 10,000-horsepower megashredder SDI is installing in Indianapolis.

OmniSource provides about 10 to 15 percent of SDI's ferrous scrap needs. In total, the scrap company handles about 5.7 million long tons of iron and steel scrap and about 800,000 pounds of nonferrous scrap per year. It employs 2,000 people at some 42 scrapyards and other facilities throughout the country generating annual sales of $2.3 billion.

Metal Management and Sims, on the other hand, are a marriage of lookalikes—both are major scrap processors that sell to foreign steelmakers as well as their home steel mills. Neither one is a captive of their domestic ferrous scrap market in much the same way that Midwest-centered OmniSource has been and likely will continue to be in the future.

Sims produces more revenue than Metal Management and operates in Europe and Asia and well as the United States, where virtually all of Metal Management's facilities are located, but Metal Management has not hesitated to sell scrap offshore when the price was too hard to ignore. Combined, Sims and Metal Management will have yards and trading offices at more than 200 locations on four continents, making it the world's largest publicly traded recycler, handling or trading more than 15 million tons of metal annually.

Metal Management has supported domestic steelmakers like SDI and Nucor Corp by supplying them with scrap, Dienst told industry analysts, even when offshore markets presented better opportunities, and the company would continue to do that in the future. But "we do expect that based upon Sims' global reach and their history of some savvy trading and getting to markets that we don't get to today, that if the opportunity presented itself (to ship scrap overseas) we would maximize that opportunity so long as our partners really didn't need the scrap. It is similar to the culture we have today, which is just we ensure that we found the right home for our scrap."

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